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18 Tax Moves You Should Make for 2018

Author: Dan Caplinger | May 20, 2018

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It's never too early to start preparing

Another tax season is in the books, and unless you had to
file for an extension, you've probably been hoping that after getting your tax
returns prepared back in April, you could just forget about taxes for a while.
Yet tax planning knows no season, and it's never too early to start thinking
about how you can get yourself in position to save on your taxes in the coming
year. Below, we've come up with 18 popular moves that can help you pay less to
Uncle Sam in 2018.

1. Contribute to an IRA

Many people think about IRAs as a great last-minute way to
save on taxes, because you get until mid-April of next year to make
contributions for the current tax year. Yet the sooner you get money into an
IRA, the more time your investments will have to generate tax-deferred income
and gains. That can make a huge difference to your long-term returns, and with
the ability for those of any age to contribute up to $5,500
to a traditional IRA and typically get a tax deduction for your
contributions, using this type of retirement can produce hundreds or even
thousands of dollars in tax savings.

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2. Save in a tax-favored retirement plan

Many employers offer retirement plans as part of their
benefits packages at work, and if you're fortunate enough to have access to a 401(k)
or other workplace retirement plan, you can set aside even more money. The
limits for 2018 are $18,500, and some employers are even kind enough to add
matching contributions that are essentially free money to entice you to
participate.

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3. See if you can use a health savings account

Health
savings accounts have even bigger tax benefits if you qualify. HSAs are
tied to high-deductible health insurance plans, and for 2018, those with
individual health coverage can contribute $3,450, while family coverage
participants can put $6,850 into an HSA. Those contributions are deductible on
your taxes, and you don't have to pay tax on investment income or gains if you
use the money for qualifying healthcare expenses. That double benefit can give
you even more savings.

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4. Catch up if you can

IRAs, 401(k)s, and HSAs all offer the ability to make special catch-up contributions once you reach a certain age. Those over 50 can add $1,000 to the maximum IRA contribution and $6,000 to the maximum 401(k) contribution, while those over 55 can add another $1,000 to their HSAs as well. This perk is designed to help you make up for lost time as you near retirement age, so take advantage of it if you can.

5. Look at your tax withholding

You might have noticed that your take-home
pay changed at the beginning of 2018, even if your salary stayed the same.
That's because tax reform affected how much tax gets withheld from your
paychecks. By looking at the information on your IRS Form W-4 with your
employer, you can change how much money gets taken out for tax withholding. By
making sure your withholding is as accurate as possible, you can avoid having
to wait for a big year-end refund and instead keep as much of your hard-earned
money upfront as you can.

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6. Take advantage of a flex plan at work

Many employers offer flexible
spending accounts, or flex plans for short, that let you set money aside
for medical or childcare expenses. The benefit of these accounts is that the
money you divert from your paycheck to the flex plan is pre-tax, and when you
use the money for its intended purpose, you don't have to pay taxes on it.
Maximum contribution limits apply, but the more important thing to remember is
that unlike a health savings account, you risk forfeiting flex plan money if
you don't use it by the end of the year. Check with your employer for your
plan's details, but it can still be smart to use flex plans when you know that
you'll need to use the money.

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7. Move to a lower-tax state

Picking up and moving somewhere isn't necessarily something
everyone can do, but the problem with tax reform is that you're now limited in
how much in state and local taxes you can take as an itemized deduction. The maximum
deduction is now $10,000, and if you live somewhere that the combination of
state and local income and property taxes are high, you might routinely blow
through that upper limit. Starting in 2018, paying more than the limit won't do
you any good. Especially if you were already considering a move, taking taxes
into account could lead you to a tax-saving decision.

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8. Consider a Roth conversion

Unlike traditional IRAs, Roth
IRAs let your money grow on a tax-free
basis, avoiding tax even when you take withdrawals in retirement. If all
you have are traditional IRAs, you can convert all or part of them to a Roth,
but you have to include the amount converted as taxable income in the current
year. That won't save you on your taxes this year, but if you're in a low bracket
and expect to be in a higher one later on, converting could end up saving you
money in the long run.

9. Take another look at 529 plans

College savings plans, also known as 529
plans, have been around for years, letting you set money aside on a
tax-deferred basis toward college costs. As long as you use the money for
qualified educational expenses linked to college, you don't have to pay on the
account's gains. Tax reform made it possible to spend 529 plan money tax-free
on elementary and secondary school costs as well, so those who pay tuition for
a child's K-12 schooling should take another look at how the plans might help
them save on their taxes.

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10. Sell losing investments early

If you own stocks or other investments that have lost money,
selling them through a strategy called tax
loss harvesting can get you a capital loss that you can use to offset
capital gains on winning investments. You can also reduce other types of income
by up to $3,000 per year with any extra losses you have. Many people wait until
the end of the year to harvest tax losses, but doing so earlier can let you
redeploy your savings more effectively, and there's no need to wait.

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11. Donate winning investments to charity

If you have a big winner in your portfolio, giving it to
charity can give you a double tax break. Not only do you not have to pay
capital gains tax on your profits, but you can deduct the full value of the
investment as long as you've held it longer than a year. This method is
available for everything from stocks to cryptocurrencies,
so if you're charitably inclined, look at your portfolio to see what might be a
good candidate for a donation.

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12. Take required minimum distributions if you have to

Those who have traditional IRAs or 401(k)s have to start taking mandatory withdrawals from those accounts once they turn 70 1/2 years old. The calculation of exactly how much you're required to take is a bit complicated, but the cost of failing to comply is severe: a 50% IRS penalty on the amount you should have taken. Most people have until Dec. 31 to take their required minimum distribution, but there's no need to wait that long if you'd prefer to have it sooner.

13. Own a business? Find the best structure

Tax reform had a big impact on businesses, creating a tough
choice for owners. Corporate tax rates got cut from 35% to 21%, making
incorporation a less expensive option for business owners. Yet pass-through
entities like partnerships and LLCs also got a tax break. Taxes are only
one element of whether one form of business is better than another, but every
dollar you save in tax is another dollar to invest into making your business a
success.

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14. Pay estimated taxes if you need to

If you have substantial income from a source other than a
traditional job -- whether it's investment income, self-employment, or a side
job where you're treated as an independent contractor rather than an employee
-- then you might need to make quarterly
estimated tax payments. Failing to have enough tax withheld can lead to
penalties if you don't, so take a look at Form 1099-ES and run the numbers to
see whether you should be paying quarterly estimates and if so, how much will
be enough to stop you from getting penalized.

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15. Retired? Coordinate Social Security with IRA and 401(k) withdrawals

Many people don't realize that Social
Security income can be taxable. Add up your income from other sources and
then put in half of your Social Security benefits, and if that number is higher
than $25,000 for singles or $32,000 for joint filers, you'll probably owe tax
on a portion of your Social Security. To avoid that, timing when you claim
Social Security with the taxable withdrawals from retirement accounts like IRAs
and 401(k)s can help you keep your overall income under the threshold above
which you'll get taxed.

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16. Look at diverting investment income to your children

If you're in a high tax bracket and have children, you might
be able to get a benefit by holding some investments in your children's names.
Kids can earn up to $1,050 tax free, and the next $1,050 gets taxed at the
child's lower rate. Moreover, new
tax reform laws give kids a 10% rate on an additional $2,550 of income. The
net result can be thousands in saved taxes compared to what you'd pay simply
keeping investments in your own name.

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17. Rich? Make bigger gifts tax-free

Tax reform also boosted the lifetime gift and estate tax
exemption from $5.49 million in 2017 to $11.18 million in 2018. That number
affects those who pass away, but it also establishes the limit for taxable
gifts made during one's lifetime. Even those wealthy individuals who've
routinely maxed out their lifetime taxable gifts can therefore make an
additional $5.69 million in gifts in 2018 without having to pay any
out-of-pocket tax thanks to the higher exemption. With the higher lifetime
exemption set to go away after 2025, however, there's at least some uncertainty
about what will happen after that date for those who made large gifts.

18. Pay off a home equity loan

Tax reform took away the mortgage interest deduction for most
home equity loans, so there's no longer a tax advantage for having that debt
outstanding. The exception
is that if you used the home equity loan to buy, build, or improve your home,
the interest is still deductible. If you have both a regular mortgage and a
home equity loan, it now makes sense to prioritize getting the home equity loan
paid down first unless the deduction still applies -- or unless the interest
rate on the mortgage is a lot higher.

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Save everything you can

You don't have to make all of these moves in order to save a
bundle when you file your tax return next year. But the more you do, the bigger
your refund is likely to be come April 2019.